Transcript The Market System

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The Market System
Demand, Supply and Price
Determination
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The Market System
• Market consists of:
– Consumers: create a demand for a
product.
• Demand
– the amount consumers desire to purchase
at various prices
– Not what they will buy, but what they
would like to buy!
• Effective demand – must be willing AND
able to pay
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Individual and Market demand
• Market demand – consists of the sum
of all individual demand schedules in
the market
• Represented by a demand curve
• At higher prices, consumers generally
willing to purchase less than at lower
prices
• Demand Curve – negative slope,
downward sloping from left to right
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The Demand Curve
Price (£)
£10
£5
Demand
100
150
Quantity Demanded (000s)
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The Demand Curve 2
• The level of demand –
– determines where on the graph it sits
• Low demand –
– nearer the origin
• High demand –
– further from the origin (assuming same
scale)
• Dependent on a variety of factors
• Demand Curve moves in response to
changing factors
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The Demand Curve 3
• Factors influencing Demand
D = f (Pn,Pn…Pn-1, Y, T, P, A, E)
• Where:
• Pn = Price
• Pn…Pn-1 = Prices of Other Goods – Substitutes
and Complements
• Y = Incomes – the level and distribution of
income
• T = Tastes and fashions
• P = the level and structure of the population
• A = Advertising
• E = Expectations of Consumers
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The Demand Curve 4
Changes in any of the factors other than
price causes the demand curve to shift
either:
• Left (less demanded at each price) or
• Right – (More demanded at each price)
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The Demand Curve 5
Price (£)
£10
D1
Demand
D2
10
100
200
Quantity Demanded (000s)
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The Supply Curve
• Factors Influencing Supply:
• S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp)
• Where:
• Pn = Price
• Pn..Pn-1 = Profitability of other goods in production and
prices of goods in joint supply
• H = Technology
• N = Natural shocks
• F1..Fm – Costs of production
• E = expectations of producers
• Sp = Social Factors
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The Supply Curve
• Changes in any of the factors OTHER than
price cause a shift in the supply curve
• A shift in supply to the left – the amount
producers offer for sale at every price will be
less.
• A shift in supply to the right – the amount
producers wish to sell at every price increases
• HINT: Be careful to not confuse supply going
‘up’ and ‘down’ with the direction of the shift!
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The Supply Curve
Price £
Supply
£7
£3
200
800
Quantity Bought and Sold (000s)
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The Supply Curve
Price £
S1
Supply
S2
£4
100
400
900
Quantity Bought and Sold (000s)
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The Market
S
Price (£)
Surplus
£5
£3
D1
300
450
600
D
Quantity Bought and Sold (000s)
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The Market
S1
Price (£)
S
£8
£5
Shortage
D
100
350
600
Quantity Bought and Sold (000s)
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